This article is an excerpt from the 2020 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The New Zealand Auditor-General has developed a multi-year plan to review government procurement practices. In its June 2018 Annual Plan 2018/19 report, the Auditor-General announced a multi-year program to conduct ongoing public procurement audits, noting that in New Zealand “the public sector spends about $42 billion each year procuring goods and services” and there have been “some recent high-profile instances of poor procurement in the public sector.” Through its multi-year plan, the Auditor-General aimed to “improve procurement practice in the public sector” as well as “strengthen public sector accountability for procurement” and “improve trust and confidence in public sector procurement.” As the Auditor-General announced, at the end of is review program, it intends to “bring together our observations from our work to offer our reflections on procurement practice and to highlight challenges and opportunities for the public sector” and to “update our good practice guidance on procurement.” More specifically, the Auditor-General announced that it would be reviewing capacity building and the different approaches to procurement:
What we plan to do
Starting in 2018/19, we plan to examine the Ministry of Business, Innovation and Employment’s (MBIE’s) role in procurement, and focus on how it develops procurement workforce expertise and capability in central government. We will look at the governance, management, and effectiveness of procurement in procurement-intensive public entities and high-risk aspects of procurement.
We also plan to look at various approaches such as the use of all-of-government contracts, public organisations’ panels of suppliers, and public private partnerships.
It is important that public entities select the appropriate procurement approach to fit the circumstances. Different approaches involve different types of relationships with suppliers, different types of opportunity and risk, and require different ways of managing risk.
By way of follow-up, in its September 2018 report entitled Introducing our work about procurement, the Auditor-General stated that its ongoing audit efforts were part of maintaining New Zealand’s international reputation for transparency, noting that “New Zealand’s public sector generally has an enviable reputation when it comes to fraud and corruption” and that “New Zealand rated first on the Transparency International Corruption Perceptions Index in 2017.” However, the report also warned against complacency, stating that “we continue to see cases of procurement-related fraud in the public sector”, including false invoices, the misuse of fuel cards, and cyber-related fraud. The Auditor-General noted that its efforts would be focused on strengthening public accountability, achieving value for money, improving trust and confidence in the public sector, and enhancing procurement leadership in the public sector.
In its subsequent June 2019 Annual Plan 2019/20, the Auditor-General confirmed that it would review project governance in the $20 billion defence spending portfolio, the $6 billion healthcare assets portfolio, the $4.4 billion Auckland rail link initiative, and the $3 billion provincial growth infrastructure fund. The report confirmed that the Auditor-General would also be reviewing procurement workforce capacity and capability at the municipal level, as well as the use of public-private partnerships, the use of supplier rosters, and the procurement efforts supporting the maintenance of state highways.
These future audit plans are part the Auditor-General’s long legacy of reviewing the procurement practices of government institutions across New Zealand. For example, in its February 2018 report entitled Infrastructure as a Service: Are the benefits being achieved? the Auditor-General found that the government needed to improve the tracking of savings in outsourcing its technology infrastructure support services. As the report noted, the government was benefiting from the consolidation and outsourcing of information technology infrastructure services:
Benefits expected from Infrastructure as a Service
Consolidating demand
Infrastructure as a Service consolidates demand by having three ICT providers provide physical and virtual infrastructure for a potential pool of about 380 organisations. ICT providers also employ the staff needed to look after the infrastructure and provide services.
Consolidating demand leads to efficiencies, such as reduced operating overheads for data centre power, air conditioning, networking, property costs, and physical and cyber security. Fewer people should be needed to manage the ICT infrastructure, and responses to cyber-security incidents and natural disasters should be more efficient.
Reduced duplication and capital spending
Organisations that use Infrastructure as a Service do not need to buy as many ICT assets, so capital spending by organisations should reduce.
There should be less ICT infrastructure in total and less waste because there is less duplication of assets. When organisations own their ICT assets, it is common for them to own spare assets (which incurs costs), and they do not always make the best use of assets that are in use.
Better resource management, service levels, and risk management
Infrastructure as a Service allows organisations to use only the resources they need and pay only for what they use.
However, while savings were being achieved, the report also noted that the government was not tracking is savings properly, finding that the government “could improve the methods it uses to calculate benefits for two of its measures – ’organisation uptake‘ and ’business savings‘ – to reduce the risk of understating or overstating benefits”. As the report illustrates, the expectation in procurement governance includes not only achieving efficiencies and value-for-money, but also being able to record and demonstrate those achievements.
Similarly, in its March 2018 report entitled Inland Revenue Department: Procurement for the Business Transformation programme, the Auditor-General observed the challenges of transitioning to strategic procurement and maintaining proper procurement records. As the report noted, New Zealand’s Inland Revenue is undertaking a business transformation project, with an expected cost between $1.5 billion and $1.6 billion aimed at developing a modern revenue system by 2021 to help facilitate easier tax payments. However, as the report noted, this initiative presented strategic procurement challenges and called for a transformation of organization’s approach procurement:
Because the programme needed a greater number of often more costly and more complex procurements than Inland Revenue had entered into before, Inland Revenue recently changed its approach to procurement, firstly for the programme and later throughout the whole organisation. This was a positive step taken to enable procurement to better meet the programme’s needs as well as Inland Revenue’s broader needs during and after the transformation.
While the Auditor-General found that Inland Revenue had changed its staffing strategy to respond to the challenges, it found that the strategic redesign of its procurement function remained a work-in-progress:
As part of its change in approach, Inland Revenue centralised and restructured its procurement function and brought in procurement specialists with appropriate skills and resources. This change was well thought out and caused minimal disruption for the rest of Inland Revenue.
The new approach focuses on relationships and outcomes, and aims to get the best results and value for money from purchasing goods and services. One aspect of this is that Inland Revenue works closely with its most important suppliers in a structured way to monitor their performance. This has helped improve suppliers’ performance as well as helping Inland Revenue identify areas where it could improve.
In my view, Inland Revenue has a clear vision and purpose for its new approach to procurement. Although changes have been implemented only recently, there are early signs that those changes are likely to improve supplier performance and outcomes for Inland Revenue.
However, Inland Revenue still needs to make important improvements to some of the processes that support its new procurement approach. When we looked at individual procurements, Inland Revenue could not locate all the documents we asked to see. Also, in some instances, we could not find evidence that quality controls had been applied. We found an inconsistent approach to probity and inadequate documentation to support some probity decisions.
The Auditor-General therefore recommended that Inland Revenue strengthen its compliance and record-keeping practices in order to bolster its audit trail to better ensure the probity of its future procurements.
As these examples illustrate, the Auditor-General’s plan to review the procurement practices of public institutions in New Zealand is aimed at assisting those specific institutions in improving their practices, while also serving as case studies for other public institutions.
